Faking foreclosure a dangerous gamble, say advocates

Like any American with a television, Kenny Friedman has seen the news about the economic crisis. He's heard about bailouts for the financial industry, the auto industry and foreclosed homeowners and thinks he deserves some help, too.

His Plymouth home is worth less than it was when he bought it about three and a half years ago. He knows lenders are modifying mortgages to help borrowers avoid foreclosure and thinks he should also get his payment lowered.

"Now, I'm going to be paying a lot more than my neighbor because if my neighbor's foreclosing," said Friedman, "they can pay a lot less on their mortgage than I am paying for the same place."

Friedman called his lender to ask about getting his payment down, but he hit a dead end. He and his wife are doing fine, they're not having trouble paying their mortgage right now.

"They basically said they can't do anything until I'm in foreclosure, so that is where I got the idea because I was like, 'well why don't I start paying late because then they will talk to me,'" Friedman said.

Friedman said it's not fair to only help people who got into trouble through bad choices.

"I played by the rules and I got screwed so I don't want to play by the rules anymore," he said.

Not so fast, says Ed Nelson from the Minnesota Homeownership Center. He said anyone who fraudulently misses a payment is opening themselves up to serious consequences. Lenders can take legal action and force borrowers to pay. And borrowers are on the hook for lenders' legal fees.

Plus, he said homeowners asking for help have to show proof of income and hardship.

"The consumer that may be thinking this is the way I'm going to proceed," Nelson said. "I want my lower interest rate or I want a a lower principal payment, there may be long term legal credit and financial ramifications for that decision and it's not a decision anyone should take lightly."

Nelson said help should be reserved for those who really need it.

“I played by the rules and I got screwed, so I don't want to play by the rules anymore.”

Homeowner Kenny Friedman

One out of every 31 Minnesota families was in foreclosure over the last three years, and at least 80,000 more are predicted to miss at least one payment this year.

A few major banks have launched programs targeting borrowers likely to fall behind. And the federal government is also debating a $50 billion plan that would give lenders an incentive to modify loans to help homeowners avoid foreclosure.

Nicolas Retsinas, from the Joint Center for Housing Studies at Harvard, said he doesn't blame people for asking for equal treatment from the bailout package.

"Of course it's a fair question because to the extent that we are asking the government to support these efforts we are, of course, asking taxpayers to support those efforts and I think that the issue of fair and right is always a legitimate question," Retsinas said.

Retsinas said even though there are legitimate fairness questions involved, some people may also be tempted to skip payments to try to game the system. Federal officials say much of the foreclosure help that is available includes stringent criteria to weed out anyone deliberately missing a payment.

And Meg Burns, from the Federal Housing Administration, said borrowers have to prove income and employment and if they are in foreclosure they also have to certify that it wasn't intentional on their part.

"These are legally binding contracts between a lender and a borrower and it is very serious," Burns said. "If somebody stops making those payments they have, in fact, failed to fulfill the terms of their obligation."

She said the scale of the housing crisis could be misleading people to think it's not a big deal anymore to go into foreclosure.

Homeowner Kenny Friedman said, nowadays, bad credit doesn't seem to have the stigma it used to.

Still, he's not sure if deliberately falling behind would be worth the risk of a lawsuit, or worse. And his wife is not amused he's even entertaining the idea. But, he is convinced that lenders deserve a comeuppance because he blames them for creating the mess in the first place.

"I really think the banks are the reason for the whole problem," Friedman said. "I think they are the reason that home values have gone down, because they were really aggressive on getting people loans so then house values went up a lot. They caused the trouble so I don't think sticking them with the problem is anything bad."

For people like Kenny Friedman, the question is whether sticking it to the banks will leave him stuck in a worse situation.